"External demand shows no sign of a pick-up and the German economy is worsening.

"Rising oil prices have been exacerbated by problems in Venezuela and uncertainties in the Middle East," he added.

He also said that 2003 would be a challenging year for British manufacturers as economic growth was likely to be faster than last year but it would not feel like that to many firms exporting goods.

High pound

Manufacturing accounts for a fifth of the country's economic output but it has been declining for years, partly because the high value of the pound compared to the euro makes British products costly in Europe.

The pound has been weakening against the euro but that might not be enough to help manufacturers because there is another factor - economic weakness, particularly in Germany.

"There is no doubt that the recent fall in the pound against the euro will be helpful, but it is weak demand that is by far the biggest problem," said Mr McCafferty.

Official manufacturing output data out last week showed a surprise rise in November although the overall picture remained stagnant.

Interest rates were cut to a 39-year low of 4.0% in 2001 by the Bank of England in an attempt boost the struggling manufacturing sector.

But the Bank is now reluctant to cut rates any further because of fears of further heating up the housing market.

The CBI said it was not calling for a rate cut because the main problem was weak external demand.